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The Effects of Lending Restrictions Are Still Evolving

There are a number of changes to the property rules this year but the ones with most immediate day to day effect are around “responsible lending”. If you have a pre-approval letter more than 3 months old you should go back to your lender and confirm your borrowing capacity.

The property industry awaits the full consequences of the Royal Commission, but financial experts are already weighing in on whether the consequences of additional regulation may squeeze banks into a dire situation.

At the recent UBS investment conference, UBS analyst Jonathan Mott warned that the Royal Commission has created a squeeze on banks that could result in a fully-fledged credit crunch.

Mr Mott also predicted that extra verification measures on lenders could “reduce maximum borrowing capacity by [about] 30 per cent."  

He also stated that “the current improvements and tightening of underwriting standards the banks have undertaken have reduced owner-occupied maximum borrowing capacity by 7-10 per cent and investment property by ~20 per cent."

He also expressed a belief that there would be a further substantial tightening in maximum borrowing capacity to come and that the final report of the commission would “recommend that banks conduct full income and expense verification to assess a borrower's financial position.” "We believe the Australian banking sector is facing a period of substantial and sustained earnings pressure which is likely to last several years," said Mott.

However, not all share the same sentiment, other analysts believe that the majority of the regulation has already been carried out.

I for one find it hard to believe that the authorities would add to the current loan evaluation standards without waiting to see how what has been put into effect plays out in the loan market and how it affects prices in particular for entry level properties and investment properties. They already know that the government policies introduced this year have caused market adjustments designed to make property “more affordable”. Then again I am but a humble agent working at the coalface every day.

Every change to the financial system or any other system for that matter has intended and unintended consequences, it has always been that way. Our capital gains tax rules actually stop people from selling more frequently, we all hate paying taxes.

There is still a lot of commentary about Auction clearance rates. While they can be used to demonstrate that a market has topped out they really reflect the current spread between Seller expectations and buyer value perceptions.  Once those two moving closer again you will see clearance rates rise back to historic levels. That said in a market like this one you are probably better off with a “Private Treaty “ sale if you can rather than having a 70% chance of being forced into a post auction listed for sale with a price position after a very public auction that did not find a buyer at an acceptable price.
 

by David Hamilton